Singapore Could Soon Allow Trading Of Payment Token Derivatives Signaling More Possibilities For Cryptocurrency Market
The MAS consultation paper sets the wheels in motion
Singapore is looking into the possibility of allowing trades in payment token derivatives in its jurisdiction, according to a recent consultation paper. Notably, the Monetary Authority of Singapore (MAS) wants the activity to be facilitated by approved exchanges. Further, the country’s Securities and Futures Act will regulate the trading activities.
According to the consultation paper, there is a significant interest in the derivatives by international institutional investors. In particular, the consultation paper singled out Bitcoin and Ether as the most popular payment tokens. Notably, the demand for the derivatives stems from the need by the investors to “gain and hedge their exposure to the payment tokens.”
Seeing that this could open up more possibilities for the MAS to evaluate the new currency pans out, the monetary authority is considering allowing the trades. However, only approved exchanges will facilitate the trades. Particularly, the exchanges must “meet the need of investors to manage their exposure to payment tokens” to gain approval. Additionally, approval of the exchanges will enable the MAS to regulate the activity without leaving any loopholes.
Nevertheless, MAS has a piece of advice for retail investors. According to the monetary authority, the payment tokens remain too risky in light of high volatility and valuation difficulties. The price volatility of Bitcoin, Ether, and other altcoins is too high and too random for small-scale investors.
In addition, the fact that Bitcoin and the altcoins do not have an intrinsic value makes valuation impossible. Instead, the value depends on group perception and trading direction in the market. “Retail investors are advised to exercise extreme caution when trading in payment tokens and their derivatives; they could lose the whole amount put in and more,” the MAS warned.
Is it time for payment token derivatives?
Cryptocurrencies have a short but checkered history. When Bitcoin hit the scene and became popular, the only way to get exposure was to own actual tokens. However, a major problem arose. The high number of hacks, some of them hugely successful, dissuaded individuals and institutions alike from owning cryptocurrencies. Additionally, the price volatility of the tokens was too high for many to handle. Nonetheless, many individuals and institutions wanted exposure to the fast-rising cryptocurrency sector.
Therefore, the founding of BitMex opened a new world of opportunities. Notably, BitMex is a Bitcoin futures platform where investors can get exposure and hedge against Bitcoin’s volatility. Trading of Bitcoin futures on BitMex is active, and the volume traded has already touched $16 billion. As the sector gets more popular, many more players want a piece of the action.
Following BitMex’s success, the Intercontinental Exchange (ICE)-backed Bakkt launched its version of Bitcoin futures. The platform is so popular that it broke a significant milestone on Monday, December 2, 2019. Notably, the platform recorded an open trading interest of $6.5 million up from $1 million in the previous trading session. Interestingly, this sudden expansion of the trading volume indicates that investors are confident that the long-term outlook of Bitcoin is positive.
Due to the increased interest in Bitcoin futures, Bakkt is initiating the process where it will offer to settle BTC contracts with fiat cash. Currently, Bakkt settles all contracts physically. According to Adam White, the COO for Bakkt, the new feature will go live through ICE Clear Singapore. ICE Clear Singapore is a clearinghouse based in Singapore and trades on ICE Futures Singapore. Notably, the expansion of the product range offers more opportunities for more investors to access the market. Incidentally, Bakkt’s move coincides with MAS’ consultation paper.
Why the sudden interest in cryptocurrency margin trading?
Besides Bakkt and BitMex, OKEx is another major player in the cryptocurrency futures market. Recently, the exchange announced that it had expanded its product range. Notably, OKEx will be offering Tether-margined Bitcoin futures. According to the exchange, the new product reduces the risk margin that investors face after exposure to Bitcoin futures. Particularly, the introduction of Tether in the mix enables investors to trade without having to switch between fiat currency and crypto. Ultimately, this will cut down the costs associated with the activity, as well as improving its efficiency.
Nonetheless, there has to be a reason why cryptocurrency futures, especially Bitcoin futures, are trending. Interestingly, the popularity of the payment token derivatives stems from the torrid months of 2018. Throughout much of 2018, the cryptocurrency market was in the doldrums. Notably, the price of Bitcoin, similar to the altcoins, fell by approximately 80%. Therefore, investors wanted a way through which they could hedge against the declining prices. On the other hand, another section of investors was looking for means to short the cryptocurrencies. This way, investors had a convenient avenue to get short exposure to payment tokens.
As the Monetary Authority of Singapore (MAS) noted, the price of Bitcoin and other payment tokens is quite volatile. Bitcoin’s price, for example, has fluctuated quite wildly in the past one month. On November 4, 2019, Bitcoin was worth $9,218 but dropped emphatically to $6,629 in 21 days. Later on November 30, the price grew 18% to $7,819, only to begin another fall that could be spectacular if the trend continues.
Due to the high price volatility, it will continue to be difficult for retail investors to tap into the profit potential of the cryptocurrency futures market. Notably, retail investors do not have the financial muscle to withstand shocks like the one experienced in 2018. According to the language of the MAS’ consultation paper, investors in the payment token derivatives should have a huge capacity to withstand the loss. For this reason, the MAS will require that all approved exchanges “include risk warnings tailored to payment token derivatives in informational materials provided to investors.”
Nevertheless, the interest in the cryptocurrency futures from investors so far is evidence that the market is strong. Increased activity will help the market to become better, and investors’ understanding of the new asset class will grow. Ultimately, the cryptocurrency market has great potential in terms of providing value for investors.